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Friday, July 24, 2015

The Affordable Consolidation Act Moves the Insurance Market From an Oligopoly to a Duopoly

Only massive bureaucracies with huge compliance and legal departments are equipped to deal with the approximately 40,000 pages of the Patient Protection and Affordable Care Act's laws and regulations. It is crushing competition. Ultimately, I suspect we will end up with two nationwide carriers and at that point the market will be so broken we will need the government to intervene and set the market free or turn it into a fully socialized program. The trajectory of U.S. history suggests a renewed lunge toward freedom is the less likely of those choices.

So why is the insurance industry consolidating? Lots of reasons. First of all, heavily regulated industries thrive on consolidation. These companies have a lot of regulatory overhead, first of all for compliance, and second of all for lobbying. The bigger you are, the easier it is to afford a team of experts to make sure that you understand all the pertinent regulations, and a second team of experts to prevent legislators and bureaucrats from burdening you with a lot more pertinent regulations. These are largely fixed costs, and merging reduces them. Getting bigger also makes it harder for legislators to refuse to return your phone calls.

Second of all, Obamacare's new exchanges may play at least a small role. Not all of it, by a long shot -- the individual market for health insurance is a small and not particularly well-loved part of insurers' overall business. However, that piece may get larger, if Obamacare succeeds in restructuring the market for health care, as employers convert more positions to part-time jobs without benefits, or decide it's easier to give people money to shop on the exchanges than to keep dealing with the hassle of providing health insurance. And thanks to the exchanges, that individual market is now competing on price more than it did in the past, because prices are now completely transparent and roughly comparable. Pricing power suddenly matters more -- not so much the power to charge consumers more, but the power to pay suppliers less.

Which brings us to the third big reason for merging: Insurers are under pressure from other parts of the industry that are also consolidating. Hospital networks have gotten bigger and more powerful. Physicians are increasingly going to work for hospitals or large practices. This could put insurers at a disadvantage to negotiate prices. If your suppliers are highly fragmented, you can walk into the meeting and say, "Here's what we're offering; take it or leave it." But if there are only two or three big hospital networks in your area, they can say the same thing to you. This has produced something of an arms race between insurers and providers trying to get bigger so they will better be able to crush the other. When Mothra and Godzilla are battling over the city, you don't want to be the tiny human standing on the ground between them. ...